Section 138 of the Negotiable Instruments Act, 1881 makes the dishonour of a cheque a criminal offence punishable with imprisonment up to two years, or fine up to twice the cheque amount, or both. The offence is complete only when a chain of conditions is satisfied, and failure of any link in the chain provides a defence to the accused. The Supreme Court has consistently held that Section 138 is a quasi-criminal provision with a civil flavour — its primary purpose being to enhance confidence in banking transactions — and has encouraged compounding of the offence at all stages.
Essential conditions: (1) The cheque must have been drawn on a bank account and issued for discharge of a legally enforceable debt or liability. (2) The cheque must be presented for payment within 3 months of being drawn (or its validity period, whichever is shorter). (3) The drawee bank must return the cheque unpaid. (4) The payee must issue a written demand notice to the drawer within 30 days of receiving the dishonour memo from the bank, demanding payment of the cheque amount. (5) The drawer must fail to make payment within 15 days of receiving the notice. (6) The payee must file the complaint within 30 days of the expiry of the 15-day notice period.
Procedure: Complaints under Section 138 are filed before the Judicial Magistrate First Class. Following the Supreme Court's directions in Dashrath Rupsingh Rathod v. State of Maharashtra (2014), jurisdiction lies with the court within whose territorial jurisdiction the branch of the bank on which the cheque was drawn is situated. The complaint must be supported by a sworn affidavit.
Defence strategies: The accused may establish: (i) the cheque was issued as security and not for a debt; (ii) the signature is forged; (iii) the notice was not properly served; (iv) the complaint was filed beyond the limitation period; (v) the cheque was presented after its validity period; (vi) the transaction underlying the cheque is illegal or against public policy. The presumption under Sections 118 and 139 NI Act that the cheque was issued for a valuable consideration can be rebutted by the accused, though the standard of rebuttal is only probabilistic.
Compounding: Section 147 NI Act makes cheque bounce offences compoundable at any stage — even in the Supreme Court. The Supreme Court in Meters and Instruments Private Limited v. Kanchan Mehta (2017) held that courts can even acquit the accused on the basis of compensation paid to the complainant without formal compounding. Many complainants use Section 138 strategically to recover money, and most cases are settled at the pre-trial or trial stage.